A Boot Camp for the Next Tech Billionaires

9/10/2014 A Boot Camp for the Next Tech Billionaires

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A Boot Camp for the Next Tech Billionaires

Sitting at the long trestle tables in Y Combinator's Mountain View, Calif., headquarters lastJanuary, the Weeblies felt wobbly. Back home at Penn State, the three undergraduateswere alpha geeks, go-getters who'd capitalized on the university's requirement thatstudents have a Web portfolio by creating software that makes it really easy for students tobuild a personal site. The trio—David Rusenko, Dan Veltri and Chris Fanini, all 22 yearsold—decided to start a company, calling it Weebly because it sounded good and thedomain name was open. Then last November they heard about a company called YCombinator that gives seed money to fledgling start-ups and imports a bunch to SiliconValley for three months of intensive entrepreneuring. They sent off their application theday before the deadline, and made the cut.

Now they were here, just down the road from Google and Yahoo, one of 12 companies thatwould be part of Y Combinator's winter program of total immersion in the Silicon Valleystart-up life. For a techie, it was as if you were making home movies one day, and the nextday found yourself on the Paramount lot with a contract and empty film cans to fill. Nomatter where the start-ups came from—Sweden, Chicago, Oxford or even the South Pole(yes, one person arrived straight from graduate research there)—their lives would never bethe same. Also attending the dinner that night were veterans of the previous three YCombinator programs—some of them millionaires before 25. You don't see too much ofthat in State College, Pa.

That's the charm of Y Combinator. It's "American Idol" meets Wired magazine. Theinspiration came from Paul Graham, a high-energy 42-year-old who himself had amonumental start-up experience, selling his company Via-web, an e-commerceapplication, to Yahoo at the height of the boom, enriching himself and his buddies. In thespring of 2005 he made a speech at Harvard that was a broadband update of HoraceGreeley ("Start up, young man!"), then realized that he could help make it happen forothers. He gathered his former partners—Trevor Blackwell, now making robots, andRobert Morris, who achieved brief notoriety in the 1980s as the author of a virus that

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almost shut down the Internet—and recruited another friend, an investment bankernamed Jessica Livingston. They drew up the plans for an operation: from hundreds ofapplications, the YC partners would cull the 30 most promising, conducting "Idol"-styleauditions to choose a dozen or so companies for the program. Each start-up is given$5,000 plus $5,000 per founder (a start-up with two founders would get $15,000). Thismoney covers lodging, food and equipment during the program. In exchange, YCombinator (named after a mathematical function) gets a piece of the start-up, usually 5or 6 percent.

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Some critics scoff that Y Combinator's investment is peanuts for that amount of equity.But the opportunity is unparalleled—total immersion into Silicon Valley start-up culture,advice from Graham and a fast track to the top angel investors and venture-capital funds.When Graham calls the winners, the founders have only five minutes to accept. "If peopleturn us down," he says, "as far as we're concerned they've failed an IQ test."

Every Tuesday during the program, Y Combinator hosts a dinner of chili or stew for thestart-ups. At this first one, Graham and Livingston distribute gray T shirts emblazonedwith one of Graham's pithiest admonitions, MAKE SOMETHING PEOPLE WANT. Asecond, black shirt is bestowed only to start-ups that achieve a "liquidity event"—apurchase by a larger company or an IPO. It reads, I MADE SOMETHING PEOPLE WANT.

Y Combinator's model dovetails perfectly with the new start-up ethic in Silicon Valley. It'sdramatically cheaper to start a company now than it was in the dot-com boom, andpossible to build a substantial operation before requiring venture capital or achieving thatliquidity event. (To pay salaries and costs during that time, one can get "angel funding"—less money than a VC firm pays, but in exchange for less equity.) Software tools, whichused to cost hundreds of thousands, are now largely free. A wide variety of tasks can beoutsourced cheaply. Computers, servers, bandwidth and storage cost a fraction of whatthey did a decade ago. And there's no need for a marketing budget when you've gotInternet word of mouth.

As a result, when it comes to funding, "$500,000 is the new $5 million," says tech investorMike Maples. It's several weeks into the program, and Maples is in a Palo Alto, Calif.,coffeehouse for a meeting with the Weeblies. He sees a lot of people barely out of their

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teens. The old wisdom for investors in start-ups said you needed an experienced hand as aCEO. The Valley's new wisdom: don't fund anyone over 30. The average age of YCombinator founders is 25.

When the Weeblies show up for the meeting, they pull up Maples's Web site and, usingtheir software, clone it almost instantly. Then they show him how he can use Weebly totweak it easily and even redesign it. Maples's eyes open wide. Later he will explain that atthat moment, he was determined to help fund the Weebly team.

Connections with top investors are common for Y Combinator start-ups. In May 2006,Condé Nast bought Reddit, a user-generated news site from YC's initial summer 2005group. The amount wasn't announced, but Graham says the founders could live off it forthe rest of their days—and they're only 23. "Before the Reddit sale there were questionsabout the Y Combinator model," says Mike Arrington, editor of TechCrunch, the unofficialracing form for Silicon Valley start-up news. Around the same time, another YC companyalso sold to a bigger one, but it wasn't publicly announced. Between the two sales, sevenblack T shirts were distributed. Others among YC's 38 companies so far have gotten heftyangel rounds and multimillion venture-capital deals.

By the middle of the winter session, tension is building for the start-ups, which arepreparing for the upcoming Demo Day, when the room will be filled with investors. It isnot uncommon for Y Combinator start-ups to hit the restart button and drastically changeits approach as D-Day nears. One group originally planned to make online-basedpublishing software. After Graham's suggestions, it shifted the focus to collaborative wordprocessing and changed the name of the company to WriteWith. Another start-up calledSocialmoth set out to have people share personal secrets confidentially; the new idea was aplace where people in corporations could anonymously post gripes and suggestions,allegedly leading to improved practices. (New name: overhear.us.)

No company feels more under the gun than Zenter, formed by Wayne Crosby, 29, a formerAmazon.com project manager living in Phoenix, and Robbie Walker, 23, a programmer inTexas. Last summer the two chums cast around for an idea for a start-up and decided todevelop a totally Web-based PowerPoint-style application—it would be the Gmail ofpresentations.



Graham loves it when his little chicks take on the big birds. "These guys have written40,000 lines of code in three months!" he crows. "You never see that in a big company!"The Zenters did it by living a spartan existence, sharing a threadbare apartment a five-minute walk from Y Combinator. This was especially tough for Crosby, who had left hispregnant wife behind in Arizona (the couple kept in touch by video Web chats). Their dietconsisted of Lean Cuisine, with the exception of some frozen steaks that Crosby's fathersent them. The Styrofoam box in which the steaks were shipped became their coffee table.

Looming over Zenter's efforts was the knowledge that Google was working on its ownonline-presentation app. The word, though, was that the Zenters' program was better, andone day Google invited them over. The search giant made an offer that Crosby and Walkerconsidered too low, but didn't shut the door to further negotiations.

The Weeblies were also working with maniacal intensity. A Penn State alum who was a YCombinator veteran set them up with an apartment in a North Beach high-rise that is somuch a favorite of YC companies that its informal name is the "Yscraper." Paying $2,700 amonth in rent for a two-bedroom unit with a spectacular bay view, the Weeblies pushedthree desks together to make the dining area into office space.

On Demo Day, each start-up gives a 10-minute demo to a room packed with the topinvestors in the Valley. The Zenters lead off, using their own software to build thepresentation for their demo online in real time; as they give it the Weeblies follow, and nailthe crowd with the simplicity of their Web-site creation service. One of the biggest hits wasa sleeper—Octopart, an e-commerce site created by two physics grad-school dropouts; itslickly aggregates the inventories of electronic-parts sellers (normally they are buried inphone-book-size catalogs) and makes them easy to buy. Some of the demos aren't assharp, but none fall flat. "Angels and VCs who don't go to this are missing some of the bestinnovations," says Ron Conway, the Valley's most celebrated angel investor.

After Demo Day, there's only three weeks left, and the focus shifts from building productsto getting funding to keep them going after the YC program ends in April. The Weeblieshad buyout interest from a company in Maryland, Freewebs. Rusenko and Veltri took ared-eye to meet the Freewebs executives and, they say, received an offer in the lowmillions, two thirds of it in stock. They said no. Instead, they'd pursue the angel-fundingoffer sheet that was at their lawyers' office: Wilson Sonsini, the top firm in the Valley.



Pretty heady stuff for kids who were sitting out in the rain at football games only fourmonths before. "It's almost as if I can't explain it to the people back home," says ChrisFanini. His partner Dave Rusenko agrees: "First you feel real green, then little by little thelifestyle becomes normal." Dan Veltri nods. "Yeah—then it's normal to turn down an offerin the millions."

The last Y Combinator dinner in the session, on March 27, was almost nostalgia-free—though things were over, they really weren't. Most of the companies planned to stay in theValley. Y Combinator's Jessica Livingston now reports that all the companies in the groupare still going strong—most have funding lined up and the others have good prospects formoney to keep them going until they build an audience. One has even tentatively agreed toa multimillion-dollar buyout from a major tech company. (Since no deal is a deal until thefinal papers are lawyered and inked, secrecy is paramount.) "We're going to have to printmore black shirts," Livingston says.

And the Weeblies? They completed their angel round—$650,000, with the money comingfrom a consortium that includes Conway, Maples and Paul Buchheit, the former Googlerwho wrote Gmail. What did they do to celebrate? "We had a beer or two and then we wentback to work," says Rusenko. This month they're returning to State College—to graduatewith their class as Silicon Valley heroes.

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A Boot Camp for the Next Tech Billionaires